Friday, 8 July 2011

America's labour market Jobless agonistes

HOPES had risen in the past week that America’s economic soft patch was ending. They have just been doused with a bucket of cold water. The job market showed further deterioration in June from May, the government reported today. The number of non-farm jobs rose a meager 18,000, lower even than May’s 25,000 number (itself revised down from the original estimate). The two months together mark a dramatic deceleration from the previous three when payroll growth averaged 215,000 per month.

The unemployment rate, meanwhile, rose for the fourth consecutive month to 9.2%, from 9.1% in May. It was 8.8% in March. The economic recovery celebrated (if you could call it that) its second anniversary on July 1st, and in that time the unemployment rate has moved a lot while ending up almost exactly where it began. America has made almost no progress closing the output gap opened up by the recession. The U-6 unemployment rate, which includes people who have given up looking for jobs and part timers who want full time work, shot up to 16.2% from 15.8% and the average duration of unemployment hit a new high of 39.9 weeks. More women than men lost jobs. Indeed, since the recovery began, women have fared worse than men, a reversal of the pattern during the recession, as a new Pew study documents. Still, the male unemployment rate rose more last month than the female rate.

Digging deeper, the details grow worse. Hourly wages failed to rise and the average work week shrank slightly—bad news for income and thus purchasing power. The survey of households, from which the unemployment rate is drawn, shows a much bigger plunge in employment, at 445,000, than the payroll survey. The household survey is less reliable but is still a useful check. It tells us the payroll report is not understating the strength of the job market.

There is no good news in this report; in the category of "could have been worse," private sector job growth was better than the overall total, at 57,000 last month. Public employment fell, for the eighth consecutive month, led by more layoffs by state and local governments.

The best explanation for the sharp slowdown in the jobs market is the confluence of bad luck that hit the economy this spring: a sharp increase in petrol prices, a series of natural disasters, and the Japanese tsunami and earthquake that interrupted supply chains in electronics, automobiles and other industries. Most of these temporary restraints have begun to lift. The weather is back to normal, petrol prices are down 10% (nearly 40 cents per gallon) from their peak, and Japan’s disruptions are ending. Automobile production schedules are ramping up and the Institute of Supply Management found that factory activity improved from May to June. Manufacturing employment rose last month, albeit by only 6,000. Even Greece seems, yet again, to have muddled through its latest confidence crisis (but keep your eyes on much bigger Italy).

In all likelihood, the employment data will improve in coming months as consumer purchasing power and business spirits recover from the fuel price surge. Yet as we argue in an article in this week’s issue of The Economist, there is more to the disappointing trajectory of the recovery than these temporary restraints. America has only just begun to deleverage and a McKinsey study has found that comparable episodes in history have been accompanied by anemic growth and often a return to recession. While America probably won’t fall back into recession absent some new shock, its workers should get used to stop-start growth punctuated with disappointments and soft patches. Americans are not alone in this; Britain has experienced similar disappointments and Spain’s outlook is even more anemic. Both share America’s pre-existing condition of vastly overstretched household balance sheets and the opportunistic infection of exploding government debt.

While most of Europe is ahead of America in implementing plans to arrest the rise in government debt as a share of GDP, America is just beginning. In Washington, the mood surrounding negotiations over an increase in the statutory debt limit took a turn for the better this week as Republicans signaled flexibility on taxes and the Democrats did likewise on entitlements. This may be good news politically but it is ambiguous, and possibly bad, economically, if the final deal front-loads, rather than back-loads, the pain. The steady bleed of public sector jobs shows state and local government austerity is already weighing heavily. Federal fiscal policy is scheduled to tighten in January when a temporary investment tax credit and payroll tax cut expire. Layering on more austerity would pummel an economy still struggling to achieve a virtuous circle of jobs, income and spending. Mr Obama is reportedly pushing to extend the payroll tax cut for another year. That would be good, but that would not represent new stimulus, merely a softening of the fiscal restraint already in train.

And what about the Federal Reserve? Its second round of quantitative easing (QE) was completed at the end of June. The consensus is that it would have to see deflation looming to implement more. I think the bar is lower than that. Ben Bernanke, the Fed chairman, has always worried that rising unemployment could spark a pernicious cycle of declining confidence and spending. If its recent rise continues into the third quarter, expect to see Wall Street raise the odds on QE3. It’s too soon to write the recovery off, but not too soon for contingency planning.